<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1995
----------------------
Commission file number 1-12034
----------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
----------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 52-1551450
- - --------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- - ----------------------------------------- ------------------------
(Address of principal executive officer) (Zip Code)
(301) 468-9200
- - -------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of November 6, 1995, 5,258,268 Beneficial Assignee Certificates were
outstanding.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income - for the three
and nine months ended September 30, 1995 and 1994 . 3
Consolidated Statement of Changes in Partners'
Capital (Deficit) - for the nine months ended
September 30, 1995 . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1995 and 1994 . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 20
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 29
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 30
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in
Real estate:
Land $ 10,228,056 $ 10,228,056
Buildings and personal property 71,895,919 71,895,919
------------ ------------
82,123,975 82,123,975
Less: accumulated depreciation (13,464,641) (11,343,330)
------------ ------------
68,659,334 70,780,645
Mortgage revenue bond and working
capital loan 8,254,707 8,254,707
------------ ------------
76,914,041 79,035,352
Cash and cash equivalents 131,737 100,513
Restricted cash and cash equivalents 2,113,785 1,345,940
Marketable securities 1,304,826 1,707,572
Working capital reserves invested in
marketable securities 4,001,726 3,846,520
Interest reserves invested in marketable
securities 298,750 414,326
Receivables and other assets 654,322 845,809
------------ ------------
Total assets $ 85,419,187 $ 87,296,032
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Distributions payable $ 1,593,575 $ 2,177,886
Deferred revenue 1,490,624 1,507,697
Accrued mortgage administration and
servicing fees due to related parties 1,599,573 1,183,505
Other liabilities related to real estate
operations 1,101,278 804,592
Accounts payable and accrued expenses 360,304 145,954
------------ ------------
Total liabilities 6,145,354 5,819,634
------------ ------------
Partners' capital (deficit):
General Partner (404,862) (382,616)
Beneficial Assignee Certificates (BACs)
- 5,258,268 BACs issued and outstanding 79,678,695 81,859,014
------------ ------------
Total partners' capital 79,273,833 81,476,398
------------ ------------
Total liabilities and partners'
capital $ 85,419,187 $ 87,296,032
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income from investment
in real estate:
Rental revenue $ 3,274,830 $ 3,527,455 $ 9,597,814 $ 9,594,664
Rental expenses (1,802,847) (2,317,149) (5,139,063) (5,474,394)
Depreciation (707,104) (725,885) (2,121,311) (2,177,654)
------------ ------------ ------------ ------------
Net rental income 764,879 484,421 2,337,440 1,942,616
Mortgage revenue
bond and working
capital loan 192,257 90,299 684,105 170,359
------------ ------------ ------------ ------------
957,136 574,720 3,021,545 2,112,975
------------ ------------ ------------ ------------
Other income (expenses):
Other interest
income 39,548 32,699 137,302 169,088
Merger-related
expenses (285,367) -- (285,367) --
General and adminis-
trative (51,732) (36,572) (238,628) (239,009)
Professional fees (19,068) (16,498) (56,692) (59,723)
------------ ------------ ------------ ------------
(316,619) (20,371) (443,385) (129,644)
------------ ------------ ------------ ------------
Net income $ 640,517 $ 554,349 $ 2,578,160 $ 1,983,331
============ ============ ============ ============
Net income allocated
to General Partner
(1.01%) $ 6,469 $ 5,599 $ 26,039 $ 20,032
============ ============ ============ ============
Net income allocated
to BAC Holders
(98.99%) $ 634,048 $ 548,750 $ 2,552,121 $ 1,963,299
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income per BAC $ 0.13 $ 0.10 $ 0.49 $ 0.37
============ ============ ============ ============
BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 81,859,014 $ (382,616) $ 81,476,398
Net income 2,552,121 26,039 2,578,160
Distributions paid or accrued
of $0.90 per BAC (including
return of capital of
$0.41 per BAC) (4,732,440) (48,285) (4,780,725)
------------ ---------- ------------
Balance, September 30, 1995 $ 79,678,695 $ (404,862) $ 79,273,833
============ ========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,578,160 $ 1,983,331
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 2,121,311 2,177,654
Adjustment to reclass real estate to
mortgage revenue bond -- 281,657
Changes in assets and liabilities:
Increase in restricted cash
and cash equivalents (767,845) (897,915)
Decrease in receivables and other
assets 191,487 15,103
(Decrease) increase in deferred
revenue (17,073) 118,480
Increase in accrued mortgage admini-
stration and servicing fees due
to related parties 416,068 367,642
Increase in other liabilities related
to real estate operations 296,686 713,030
Increase (decrease) in accounts payable
and accrued expenses 214,350 (23,146)
------------ ------------
Net cash provided by operating
activities 5,033,144 4,735,836
------------ ------------
Cash flows from investing activities:
Net sales of marketable securities 402,746 8,446
(Deposits to) withdrawals from working
capital reserves invested in
marketable securities (155,206) 1,749,896
Withdrawals from interest reserves
invested in marketable securities 115,576 --
------------ ------------
Net cash provided by investing
activities 363,116 1,758,342
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Distributions paid to BAC Holders and
General Partner (5,365,036) (6,484,789)
------------ ------------
Net increase in cash and cash equivalents 31,224 9,389
Cash and cash equivalents, beginning of
period 100,513 66,833
------------ ------------
Cash and cash equivalents, end of period $ 131,737 $ 76,222
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF III Associates Limited Partnership (the General
Partner), the accompanying unaudited consolidated financial statements of
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) contain all adjustments of a normal recurring nature necessary to
present fairly the Partnership's consolidated financial position as of September
30, 1995 and December 31, 1994 and the results of its consolidated operations
for the three and nine months ended September 30, 1995 and 1994 and its
consolidated cash flows for the nine months ended September 30, 1995 and 1994.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. While the General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes included
in the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.
The Partnership's consolidated balance sheets reflect the financial
position of seven properties for the dates presented. The Partnership's
consolidated statements of income include the rental income, rental expenses and
depreciation of the seven properties, exclusive of debt service due to the
Partnership, as a result of the receipt of deeds in lieu of foreclosure,
transfer of partnership interests (for Geary Courtyard) or upon acquisition,
development or construction (ADC) determination, as further discussed in Note 3.
One property, Paces River 2, is not included in this consolidation due to the
implementation of SFAS No. 114, as discussed below.
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan". This statement, as amended, addresses how a creditor
should measure impairment of a loan and requires that loans previously accounted
for as in-substance foreclosed (ISF) be accounted for in accordance with SFAS
No. 114. This statement is effective for fiscal years beginning after December
15, 1994 and was implemented by the Partnership in the first quarter of 1995.
The adoption of SFAS No. 114 resulted in the reclassification of the investment
in Paces River 2 from real estate to a loan. The investment in Paces River 2 is
now reflected on the Partnership's consolidated balance sheets as an investment
in mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707, which represents the carrying value of the property,
net of accumulated depreciation and deferred revenue, as of September 30, 1995
and December 31, 1994. The mortgage revenue bond and working capital loan
original principal balances are $8,750,000 and $850,000, respectively. The
Partnership expects the full principal amounts of the loans to be repaid at
maturity in 2000. The Partnership recognizes the income from the Paces River 2
investment on an accrual basis.
Certain amounts, including those relating to Paces River 2, in the 1994
consolidated financial statements have been reclassified to conform with the
1995 presentation in accordance with SFAS No. 114. Net rental income for Paces
River 2 of $90,299 and $170,359 for the three and nine months ended
-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION - Continued
September 30, 1994, respectively, has been reclassified as mortgage revenue bond
and working capital loan interest. Actual Paces River 2 mortgage revenue bond
interest received by the Partnership during the three and nine months ended
September 30, 1994 was $172,811 and $525,726, respectively. Actual Paces River
2 working capital loan interest received by the Partnership during the three and
nine months ended September 30, 1994 was $9,564, and $35,213, respectively. The
reclassification of prior year net rental income for Paces River 2 did not
result in a restatement of prior year's Partner's Capital (Deficit).
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership. If the merger proposal is approved
by a majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled.
The redemption price per BAC will be $14.360. In addition, the General Partner
will sell its 1.01% general partnership interest in the Partnership to CAPREIT
for $500,000. CAPREIT will also acquire an account receivable held by an
affiliate and a former affiliate of the General Partner for the accrued mortgage
servicing and administration fees on the related property mortgage loans by
paying the discounted amount of $1,620,966.
Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption price to BAC Holders from a
financial point of view. A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission. This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.
3. INVESTMENTS
The Partnership invested in eight federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. As discussed in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1994, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to nominees of the Partnership. As
a result, the Partnership accounts for these investments as real estate for
financial statement purposes. Additionally, the Partnership accounts for the
Washington Ridge mortgage revenue bond as real estate in accordance with the
American Institute of Certified Public Accountants Notice to Practitioners - ADC
Arrangements. Accordingly, the consolidated balance sheets reflect these
investments in the amount of $68,659,334 and $70,780,645 as of September 30,
1995 and December 31, 1994, respectively, net of accumulated depreciation, based
on the lower of cost or fair value at the earlier of date of deed in lieu of
foreclosure, transfer of partnership interests, or acquisition, development and
construction (ADC) determination. The Partnership continues to evaluate these
investments on a lower of cost or net realizable basis, taking into
consideration the Partnership's intention for the nominees to hold these
-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
properties for the long term if necessary, and with investor consent, in order
to recover its recorded investment. The financial statement presentation is
independent of the characterization of the bonds as loans for federal income tax
purposes and the tax-exempt nature of the mortgage revenue bond interest.
Additionally, the Partnership accounts for the investment in the Paces River 2
mortgage revenue bond and working capital loan as loans with a recorded
investment of $8,254,707 as of September 30, 1995 and December 31, 1994, in
accordance with SFAS No. 114, as discussed above.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified. In response to this decision, in December 1992, the Internal Revenue
Service issued proposed regulations in connection with the modification of debt
instruments. If the regulations are adopted in their present form, they would
alter existing authority and curtail the type and extent of modifications that
could be made by a bond owner/lender without adversely affecting the tax-exempt
status of bonds. It is not clear at this time what effect the Cottage Savings
decision or the proposed regulations may have on the Partnership with respect to
the bonds secured by loans on properties currently held by nominees. The
General Partner continues to believe that these bonds remain tax-exempt. The
General Partner will continue its efforts to protect the tax-exempt status of
the bonds and the interest thereon. However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.
As of September 30, 1995, the Partnership had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses, and are stated at cost, which generally represents
par value and approximates market value. The Partnership has classified these
investments as Available for Sale in accordance with SFAS No. 115. Realized
gains and losses on the sale of marketable securities were determined on a
specific identification basis. There were no net unrealized holding gains or
losses recognized during the three and nine months ended September 30, 1995 as
there was no material difference between the cost for the tax-exempt municipal
bonds and fair value throughout the first three quarters of 1995.
Following are updates of significant events affecting the Partnership's
properties during the nine months ended September 30, 1995:
-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Regency Woods
-------------
Shortfalls in interest payments from Regency Woods were being paid
from draws on a $250,000 irrevocable letter of credit. The Partnership
drew down the full amount remaining under the letter of credit in January
1995, resulting in the default by the borrower on the working capital loan.
The borrower transferred the property by deed in lieu of foreclosure to a
nominee of the Partnership as of February 28, 1995.
Woodlane Place
--------------
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage
due to frost heaving. The nominee owner hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine
the number of affected buildings and the severity of the drainage problem.
Based on this analysis, the costs associated with the correction of the
drainage problem are expected to be approximately $300,000, and will not be
covered by the property's insurance carrier. Property improvements
relating to the drainage problem totalling approximately $29,000 were
completed in the fourth quarter of 1994 and are included in buildings and
personal property in the consolidated balance sheets. As the remaining
costs to correct the drainage problem are capitalizable costs and the work
had not begun as of September 30, 1995, the consolidated financial
statements do not include an adjustment for the remaining estimated costs.
A contract for $55,000 in drainage work, representing the first phase of
the repairs, has been negotiated and work on the repairs began in October
1995. The remaining repairs are expected to be completed in 1996 and 1997.
Due to the nature of the drainage problem, occupancy levels at the property
are not expected to decrease as a result of the ongoing capital
improvements. Funding for these capital improvements may be provided from
the property's existing replacement reserves, future property cash flow,
and/or a loan to the property from the working capital reserves of the
Partnership.
The Partnership has joined with the property's insurance carrier in a
lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal
fees being incurred unless the Partnership receives a settlement or
judgement, and with other legal expenses estimated to be less than $20,000.
There is no assurance that the Partnership will receive any funds as a
result of this lawsuit.
-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Ethan's Glen IIA
----------------
In April 1995, Ethan's Glen IIA suffered damage to certain roofs due
to a severe hail storm. The cost to repair the damaged roofs was paid by
the property's insurance carrier, less a minimal deductible.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The proposed merger agreement stipulates that current year
distributions cannot exceed ten cents per BAC per month. The agreement also
stipulates that distributions during 1996 cannot exceed 95% of Cash Flow, as
defined in the Partnership Agreement. There are no other legal restrictions on
the Partnership's present or future ability to make cash distributions. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, the Partnership will not be able to maintain the
distributions to BAC Holders at the 1994 level. It is expected that the 1995
distributions will be based primarily on cash flow from the Partnership's
operations. Cash flow from the Partnership's operations consists of cash flow
from six of the properties, plus specified interest payments from two properties
and contingent interest payments from one property, supplemented by any
available property reserves/borrower guarantees, less Partnership expenses. The
Partnership seeks to optimize cash flow from the properties owned by nominees.
Despite these efforts, the amounts paid to the Partnership from the properties'
operations may be expected to fluctuate from period to period due to changes in
occupancy rates, rental rates, operating expenses and other variables. Based
upon the current operations of the Partnership, the 1995 distribution is
expected to approximate $1.20 per BAC.
The following distributions were paid or accrued to BAC Holders of record
for the first three quarters of 1995 and 1994:
-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- -------------------
Quarter Ended Total Per BAC Total Per BAC
- - ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 1,577,480 $ 0.30 $ 2,103,307 $ 0.40
June 30, 1,577,480 0.30 2,155,890 0.41
September 30, 1,577,480 0.30 2,155,890 0.41
----------- ------- ----------- -------
Totals $ 4,732,440 $ 0.90 $ 6,415,087 $ 1.22
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flow (1) $ 1,442,204 $ 1,494,646
Withdrawals from working capital/interest
reserves 151,371 683,241
------------ ------------
Total cash available for distribution $ 1,593,575 $ 2,177,887
============ ============
Distributions to:
General Partner (1.01%) $ 16,095 $ 21,997
============ ============
BAC Holders (98.99%) $ 1,577,480 $ 2,155,890
============ ============
</TABLE>
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flow (1) $ 4,820,355 $ 4,730,645
(Deposits to) withdrawals from working
capital/interest reserves (39,630) 1,749,896
------------ ------------
Total cash available for distribution $ 4,780,725 $ 6,480,541
============ ============
Distributions to:
General Partner (1.01%) $ 48,285 $ 65,454
============ ============
BAC Holders (98.99%) $ 4,732,440 $ 6,415,087
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the quarter ending
December 31, 1995 to be approximately $0.30 per BAC, payable on February 14,
1996, or possibly earlier depending on the merger closing date, to BAC Holders
of record as of the last day in each month.
The Partnership has working capital reserves which may be available for the
ongoing costs of operating the Partnership, for supplementing distributions to
investors and for making working capital loans to the borrowers. As of
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 and $3,846,520, respectively, both of which exceed the Partnership's
minimum working capital reserve balance of approximately $3,718,000. The minimum
working capital reserve balance may be increased or decreased from time to time
as deemed necessary by the General Partner. The surplus working capital reserve
balance of approximately $284,000 as of September 30, 1995 may be used to
supplement distributions to BAC Holders. Net withdrawals from the surplus
working capital reserves to fund distributions for the three and nine months
ended September 30, 1995, were $151,371 and $0, respectively. Net withdrawals
from the surplus working capital reserves to fund distributions for the three
and nine months ended September 30, 1994, were $683,241 and $1,749,896,
respectively.
Interest reserves relating to Regency Woods of $0 and $115,576 were
transferred to working capital reserves during the three and nine months ended
September 30, 1995, respectively, to fund distributions to BAC Holders. As of
September 30, 1995, interest reserves relating to Regency Woods had been
depleted, and interest reserves applicable to Washington Ridge were $298,750.
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
As of December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326. No interest reserves were transferred to
working capital reserves during 1994.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of interest is discontinued, when at the time of accrual, collectibility
of the interest due is considered unlikely. Once a loan has been placed on a
non-accrual status, income is recorded only as cash payments are received from
the borrower or nominee until such time as the uncertainty of collection of
unpaid base interest is eliminated. In 1993, Geary Courtyard, Woodlane Place
and Valley Creek II were placed on a non-accrual status for income tax purposes;
therefore, income is recognized only to the extent of cash received. Contingent
interest from the investment is recognized as revenue when collected.
Contingent interest of $9,775 and $56,522 was recognized from Washington Ridge
for the three and nine months, respectively, ended September 30, 1995. No
contingent interest was recognized for the three or nine months ended September
30, 1994.
As discussed in Note 3, seven of the eight investments in mortgage revenue
bonds and two of the three working capital loans are accounted for as
investments in real estate for financial statement purposes as of September 30,
1995. However, for federal income tax purposes the investments in all of the
mortgage revenue bonds and working capital loans are treated as loans. Interest
on the investment in mortgage revenue bonds, which represents approximately 96%
of the Partnership's income for tax purposes, is exempt from federal income tax.
A reconciliation of the primary differences between the financial statement net
income and municipal income for tax purposes is as follows:
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement
net income $ 640,517 $ 554,349 $ 2,578,160 $ 1,983,331
Municipal interest
income not
recognized(1) 1,717,069 1,254,333 4,884,282 4,587,585
Rental income,
net (2) (764,879) (484,421) (2,337,440) (1,942,616)
Accrued interest
on delinquent
interest (3) 41,297 31,882 116,279 86,892
Excess amortization
for tax purposes (36,150) (36,150) (108,450) (108,450)
Taxable income on
working capital
loans not
recognized (1) 43,565 63,009 80,964 189,025
------------ ------------ ------------ ------------
Municipal income,
net for tax
purposes $ 1,641,419 $ 1,383,002 $ 5,213,795 $ 4,795,767
============ ============ ============ ============
Municipal income
per BAC $ 0.31 $ 0.26 $ 0.98 $ 0.90
============ ============ ============ ============
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
(3) Represents interest on delinquent base interest, for loans on accrual
status for income tax purposes, compounded monthly at the base rate of
interest of the applicable loan.
Although the Partnership accounted for seven of the eight mortgage loan
investments and two of the three working capital loans as real estate for
financial statement purposes, the Partnership continued to charge all of the
borrowers interest under the terms of the original loans and interest on unpaid
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
base interest. The following tables summarize the full base interest payments
for the nine months ended September 30, 1995 and 1994 that are due to the
Partnership from the loans and properties:
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
--------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Glen IIA $ 690,703 $ 547,277 $ -- $ 143,426
Geary Courtyard 1,305,450 577,000 -- 728,450
Ocean Walk 1,330,820 1,209,332 -- 121,488
Paces River 2 576,769 607,835 -- --
Regency Woods 520,094 333,562 17,834 168,698
Valley Creek II 689,325 520,052 -- 169,273
Washington Ridge 656,250 656,250 -- --
Woodlane Place 1,055,250 707,716 -- 347,534
------------ ----------- ----------- ----------
$ 6,824,661 $ 5,159,024 $ 17,834 $1,678,869
============ =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1994
--------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Glen IIA $ 690,703 $ 546,087 $ 65,654 $ 78,962
Geary Courtyard 1,305,450 451,329 -- 854,121
Ocean Walk 1,330,820 1,087,162 35,838 207,820
Paces River 2 576,769 560,939 -- 15,830
Regency Woods 520,094 408,055 112,039 --
Valley Creek II 689,325 387,959 -- 301,366
Washington Ridge 656,250 656,250 -- --
Woodlane Place 1,055,250 600,917 -- 454,333
------------ ----------- ---------- ----------
$ 6,824,661 $ 4,698,698 $ 213,531 $1,912,432
============ =========== ========== ==========
</TABLE>
(1) Although three of these loans were placed on non-accrual status for income
tax purposes, the Partnership also charges the borrowers interest on unpaid
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
base interest, which totalled $762,676 and $565,512 for the nine months
ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves from the mortgage loan proceeds and/or
funds from the general partners of the borrowers.
6. LITIGATION
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF III Associates
Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), C.R.I.,
Inc., William B. Dockser, H. William Willoughby, Capital Realty Investors Tax
Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership, CRITEF,
Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the State
of Delaware. The lawsuit alleges, among other matters, that certain of the
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of an
affiliate of the Partnership, against the same Defendants, in Chancery Court for
the State of Delaware. The second lawsuit makes the same allegations as the
first lawsuit. A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the lawsuits, therefore, the Partnership's financial
statements do not include any adjustment that might result from the outcome of
the lawsuits. The Defendants believe that the lawsuits are without merit and
intend to defend themselves vigorously against the allegations contained in both
lawsuits.
7. RELATED-PARTY TRANSACTIONS
The General Partner and its affiliates are entitled to receive
reimbursements from the Partnership for actual costs and expenses incurred in
connection with the operation of the Partnership. During the three and nine
months ended September 30, 1995, the General Partner and its affiliates were
reimbursed $28,425 and $124,568, respectively, and $44,029 and $145,735 for the
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
three and nine months ended September 30, 1994, respectively. These expenses are
included in general and administrative expenses and merger-related expenses in
the consolidated statements of income.
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of debt service on the mortgage loans. On June 30, 1995, CRICO
Mortgage merged with and into an affiliate of CRIIMI MAE Inc., a publicly traded
real estate investment trust (the REIT). The REIT was originally sponsored by
C.R.I., Inc. (CRI), the general partner of the General Partner, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Total unpaid fees, including those relating to Paces
River 2, of $1,599,573 and $1,183,505 were due to CRI as of September 30, 1995
and December 31, 1994, respectively. Total unpaid fees, including those
relating to Paces River 2, of $141,667 were due to the affiliate of the REIT as
of September 30, 1995, and are included in other liabilities related to real
estate operations in the consolidated balance sheets. The unpaid fees are
payable from available cash flow after payment of all current and delinquent
base interest and accrued interest on delinquent base interest. If available
cash flow from the borrower is insufficient to pay the fee, it is payable on the
earlier of prepayment or maturity of the loan, after debt repayment. Any
payments made with respect to unpaid fees will be applied against the oldest
outstanding fees first. During the six months ended June 30, 1995, the fees
paid by the borrowers to CRICO Mortgage totalled $49,312. During the three
months ended September 30, 1995, the fees paid by the borrowers to the affiliate
of the REIT totalled $18,750. Fees paid by the borrowers to CRICO Mortgage for
the three and nine months ended September 30, 1994 were $30,562 and $113,614,
respectively.
In addition, CRICO Management of Minnesota, Inc. (CRICO Minnesota), an
affiliate of the General Partner, performed property management services for
Valley Creek II, Woodlane Place, Ethan's Glen IIA and Ocean Walk through January
31, 1994. On February 1, 1994, CRICO Minnesota contributed its property
management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI but is not owned or controlled by
CRI and/or its affiliates. Management fees of $21,399 were paid or accrued to
the affiliates for the month ended January 31, 1994.
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Business
--------
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership. If the merger proposal is approved
by a majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled.
The redemption price per BAC will be $14.360. In addition, the General Partner
will sell its 1.01% general partnership interest in the Partnership to CAPREIT
for $500,000. CAPREIT will also acquire an account receivable held by an
affiliate and a former affiliate of the General Partner for the accrued mortgage
servicing and administration fees on the related property mortgage loans by
paying the discounted amount of $1,620,966.
Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption price to BAC Holders from a
financial point of view. A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission. This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.
The Partnership invested in eight federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. As discussed in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1994, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to nominees of the Partnership. As
a result, the Partnership accounts for these investments as real estate for
financial statement purposes. Additionally, the Partnership accounts for the
Washington Ridge mortgage revenue bond as real estate in accordance with the
American Institute of Certified Public Accountants Notice to Practitioners - ADC
Arrangements. Accordingly, the consolidated balance sheets reflect these
investments in the amount of $68,659,334 and $70,780,645 as of September 30,
1995 and December 31, 1994, respectively, net of accumulated depreciation, based
on the lower of cost or fair value at the earlier of date of deed in lieu of
foreclosure, transfer of partnership interests, or acquisition, development and
construction (ADC) determination. The Partnership continues to evaluate these
investments on a lower of cost or net realizable basis, taking into
consideration the Partnership's intention for the nominees to hold these
properties for the long term if necessary, and with investor consent, in order
to recover its recorded investment. The financial statement presentation is
independent of the characterization of the bonds as loans for federal income tax
purposes and the tax-exempt nature of the mortgage revenue bond interest.
Additionally, the Partnership accounts for the investment in the Paces River 2
mortgage revenue bond and working capital loan as loans with a recorded
investment of $8,254,707 as of September 30, 1995 and December 31, 1994, in
accordance with SFAS No. 114, as discussed above.
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan". This statement, as amended, addresses how a creditor
should measure impairment of a loan and requires that loans previously accounted
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
for as in-substance foreclosed (ISF) be accounted for in accordance with SFAS
No. 114. This statement is effective for fiscal years beginning after December
15, 1994 and was implemented by the Partnership in the first quarter of 1995.
The adoption of SFAS No. 114 resulted in the reclassification of the investment
in Paces River 2 from real estate to a loan. The investment in Paces River 2 is
now reflected on the Partnership's consolidated balance sheets as an investment
in mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707, which represents the carrying value of the property,
net of accumulated depreciation and deferred revenue, as of September 30, 1995
and December 31, 1994. The mortgage revenue bond and working capital loan
original principal balances are $8,750,000 and $850,000, respectively. The
Partnership expects the full principal amounts of the loans to be repaid at
maturity in 2000. The Partnership recognizes the income from the Paces River 2
investment on an accrual basis.
Following are updates of significant events affecting the Partnership's
properties during the nine months ended September 30, 1995:
Regency Woods
-------------
Shortfalls in interest payments from Regency Woods were being paid
from draws on a $250,000 irrevocable letter of credit. The Partnership
drew down the full amount remaining under the letter of credit in January
1995, resulting in the default by the borrower on the working capital loan.
The borrower transferred the property by deed in lieu of foreclosure to a
nominee of the Partnership as of February 28, 1995.
Woodlane Place
--------------
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage
due to frost heaving. The nominee owner hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine
the number of affected buildings and the severity of the drainage problem.
Based on this analysis, the costs associated with the correction of the
drainage problem are expected to be approximately $300,000, and will not be
covered by the property's insurance carrier. Property improvements
relating to the drainage problem totalling approximately $29,000 were
completed in the fourth quarter of 1994 and are included in buildings and
personal property in the consolidated balance sheets. As the remaining
costs to correct the drainage problem are capitalizable costs and the work
had not begun as of September 30, 1995, the consolidated financial
statements do not include an adjustment for the remaining estimated costs.
A contract for $55,000 in drainage work, representing the first phase of
the repairs, has been negotiated and work on the repairs began in October
1995. The remaining repairs are expected to be completed in 1996 and 1997.
Due to the nature of the drainage problem, occupancy levels at the property
are not expected to decrease as a result of the ongoing capital
improvements. Funding for these capital improvements may be provided from
the property's existing replacement reserves, future property cash flow,
and/or a loan to the property from the working capital reserves of the
Partnership.
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership has joined with the property's insurance carrier in a
lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal
fees being incurred unless the Partnership receives a settlement or
judgement, and with other legal expenses estimated to be less than $20,000.
There is no assurance that the Partnership will receive any funds as a
result of this lawsuit.
Ethan's Glen IIA
----------------
In April 1995, Ethan's Glen IIA suffered damage to certain roofs due
to a severe hail storm. The cost to repair the damaged roofs was paid by
the property's insurance carrier, less a minimal deductible.
Financial Condition/Liquidity
----------------------------
The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on mortgage loans, which are dependent upon
the net operating income of the properties. Therefore, the Partnership's
investment in the mortgage revenue bonds and working capital loans is subject to
the general risks inherent in the ownership of real property. These risks
include reduction in rental income due to an inability to maintain occupancy
levels, adverse changes in general economic conditions, and adverse changes in
local conditions. The General Partner expects that the properties transferred
to nominees of the Partnership will continue to generate sufficient cash flow to
pay all operating expenses, meet escrow deposit requirements and pay some, but
not all, of the base interest due to the Partnership. Other than the estimated
$270,000 in drainage correction costs relating to Woodlane Place, as discussed
above, the Partnership has no material commitments for capital expenditures.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified. In response to this decision, in December 1992, the Internal Revenue
Service issued proposed regulations in connection with the modification of debt
instruments. If the regulations are adopted in their present form, they would
alter existing authority and curtail the type and extent of modifications that
could be made by a bond owner/lender without adversely affecting the tax-exempt
status of bonds. It is not clear at this time what effect the Cottage Savings
decision or the proposed regulations may have on the Partnership with respect to
the bonds secured by loans on properties currently held by nominees. The
General Partner continues to believe that these bonds remain tax-exempt. The
General Partner will continue its efforts to protect the tax-exempt status of
the bonds and the interest thereon. However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.
The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates. If the merger proposal is approved,
the interests of the BAC Holders would be redeemed at closing. If the merger
proposal is not approved, in order to maximize the overall yield, the General
-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partner may recommend for investor approval extension of certain loan maturity
dates and, if approved, arrange for related adjustments of the pertinent
mortgage revenue bonds as needed.
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The proposed merger agreement stipulates that current year
distributions cannot exceed ten cents per BAC per month. The agreement also
stipulates that distributions during 1996 cannot exceed 95% of Cash Flow, as
defined in the Partnership Agreement. There are no other legal restrictions on
the Partnership's present or future ability to make cash distributions. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, the Partnership will not be able to maintain the
distributions to BAC Holders at the 1994 level. It is expected that the 1995
distributions will be based primarily on cash flow from the Partnership's
operations. Cash flow from the Partnership's operations consists of cash flow
from six of the properties, plus specified interest payments from two properties
and contingent interest payments from one property, supplemented by any
available property reserves/borrower guarantees, less Partnership expenses. The
Partnership seeks to optimize cash flow from the properties owned by nominees.
Despite these efforts, the amounts paid to the Partnership from the properties'
operations may be expected to fluctuate from period to period due to changes in
occupancy rates, rental rates, operating expenses and other variables. Based
upon the current operations of the Partnership, the 1995 distribution is
expected to approximate $1.20 per BAC.
The following distributions were paid or accrued to BAC Holders of record
for the first three quarters of 1995 and 1994:
-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- -------------------
Quarter Ended Total Per BAC Total Per BAC
- - ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 1,577,480 $ 0.30 $ 2,103,307 $ 0.40
June 30, 1,577,480 0.30 2,155,890 0.41
September 30, 1,577,480 0.30 2,155,890 0.41
----------- ------- ----------- -------
Totals $ 4,732,440 $ 0.90 $ 6,415,087 $ 1.22
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flow (1) $ 1,442,204 $ 1,494,646
Withdrawals from working capital/interest
reserves 151,371 683,241
------------ ------------
Total cash available for distribution $ 1,593,575 $ 2,177,887
============ ============
Distributions to:
General Partner (1.01%) $ 16,095 $ 21,997
============ ============
BAC Holders (98.99%) $ 1,577,480 $ 2,155,890
============ ============
</TABLE>
-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flow (1) $ 4,820,355 $ 4,730,645
(Deposits to) withdrawals from working
capital/interest reserves (39,630) 1,749,896
------------ ------------
Total cash available for distribution $ 4,780,725 $ 6,480,541
============ ============
Distributions to:
General Partner (1.01%) $ 48,285 $ 65,454
============ ============
BAC Holders (98.99%) $ 4,732,440 $ 6,415,087
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the quarter ending
December 31, 1995 to be approximately $0.30 per BAC, payable on February 14,
1996, or possibly earlier depending on the merger closing date, to BAC Holders
of record as of the last day in each month.
The Partnership has working capital reserves which may be available for the
ongoing costs of operating the Partnership, for supplementing distributions to
investors and for making working capital loans to the borrowers. As of
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 and $3,846,520, respectively, both of which exceed the Partnership's
minimum working capital reserve balance of approximately $3,718,000. The minimum
working capital reserve balance may be increased or decreased from time to time
as deemed necessary by the General Partner. The surplus working capital reserve
balance of approximately $284,000 as of September 30, 1995 may be used to
supplement distributions to BAC Holders. Net withdrawals from the surplus
working capital reserves to fund distributions for the three and nine months
ended September 30, 1995, were $151,371 and $0, respectively. Net withdrawals
from the surplus working capital reserves to fund distributions for the three
and nine months ended September 30, 1994, were $683,241 and $1,749,896,
respectively.
Interest reserves relating to Regency Woods of $0 and $115,576 were
transferred to working capital reserves during the three and nine months ended
September 30, 1995, respectively, to fund distributions to BAC Holders. As of
September 30, 1995, interest reserves relating to Regency Woods had been
depleted, and interest reserves applicable to Washington Ridge were $298,750.
-25-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
As of December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326. No interest reserves were transferred to
working capital reserves during 1994.
As of September 30, 1995, the Partnership had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses, and are stated at cost, which generally represents
par value and approximates market value. The Partnership has classified these
investments as Available for Sale in accordance with SFAS No. 115. Realized
gains and losses on the sale of marketable securities were determined on a
specific identification basis. There were no net unrealized holding gains or
losses recognized during the three and nine months ended September 30, 1995 as
there was no material difference between the cost for the tax-exempt municipal
bonds and fair value throughout the first three quarters of 1995.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements
and distributions to BAC Holders. The Partnership's net cash provided by
operating activities for the nine months ended September 30, 1995, which
consists primarily of receipt of base interest on mortgage loans, was adequate
to support operating requirements and the payment of declared distributions to
BAC Holders and the General Partner. The Partnership estimates that future cash
flows from receipt of base interest on mortgage loans, in the aggregate, will be
sufficient to pay operating expenses and make distributions to BAC Holders.
Results of Operations
---------------------
The Partnership's net income for the three months ended September 30, 1995
increased from the same period in 1994 primarily due to a decrease in rental
expenses resulting from repairs made in 1994 relating to fire damage and frost
heaving at Ocean Walk and Woodlane Place, respectively, as well as a decrease in
real estate tax expense at Woodlane Place resulting from a special assessment
paid in 1994. Contributing to the increase in net income was the
reclassification of the investment in Paces River 2 from real estate to loan, in
accordance with SFAS No. 114, as discussed above. In 1995, the Partnership
recognized income from the Paces River 2 mortgage revenue bond and working
capital loan on an accrual basis. The 1994 income from the Paces River 2
mortgage revenue bond and working capital loan is limited to the property's net
rental income due to its classification as real estate in 1994. Also
contributing to the increase in net income was a decrease in depreciation
expense as a result of the use of an accelerated method for personal property.
Partially offsetting the increase in net income were fees incurred by the
Partnership for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed merger, as
previously discussed, as well as a decrease in rental revenue resulting from the
receipt in 1994 of insurance reimbursements for repairs to Ocean Walk and
Woodlane Place, as discussed above. The decrease in rental revenue was
partially offset by an increase in occupancy and rental rates at certain
properties. Also partially offsetting the increase in net income was an
increase in general and administrative expenses due to the recognition in the
third quarter of 1994 of decreased annual report printing costs.
-26-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership's net income for the nine months ended September 30, 1995
increased from the same period in 1994 primarily due to the reclassification of
the investment in Paces River 2, a decrease in rental expenses and a decrease in
depreciation expense, as discussed above. Partially offsetting the increase in
net income were fees incurred for an independent fairness opinion, as discussed
above, as well as a decrease in other interest income resulting from lower cash
and investment balances.
Presented below is a summary of the rental operations for the nine months
ended September 30, 1995 and 1994 of each of the properties accounted for as
Investment in Real Estate in which the Partnership has invested.
<TABLE>
<CAPTION>
Average Physical
Name of Investment No. of Occupancy
Rental Property Rental for the nine months
and Location Units ended September 30,
- - ------------------ ------ --------------------
1995 1994
---- ----
<S> <C> <C> <C>
Ethan's Glen IIA
Kansas City, MO 242 93% 92%
Geary Courtyard
San Francisco, CA 164 93% 90%
Ocean Walk
Key West, FL 296 95% 93%
Paces River 2
Rock Hill, SC 230 96% 97%
Regency Woods
West Des Moines, IA 200 95% 96%
Valley Creek II
Woodbury, MN 177 97% 95%
Washington Ridge
Knoxville, TN 248 96% 95%
Woodlane Place
Woodbury, MN 216 98% 97%
----- --- ---
1,773 95% 94%
===== === ===
</TABLE>
-27-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
Base Interest Paid From Net Rental Operating
Name of Investment Properties' Operations(1) Income (2)
Rental Property for the nine months ended for the nine months ended
and Location September 30, September 30,
- - ------------------ --------------------------- --------------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Ethan's Glen IIA
Kansas City, MO $ 547,277 $ 546,087 $ 586,439 $ 562,689
Geary Courtyard
San Francisco, CA 577,000 451,329 631,505 442,318
Ocean Walk
Key West, FL 1,209,332 1,087,162 1,250,336 1,242,732
Paces River 2 (3)
Rock Hill, SC 607,835 560,939 -- --
Regency Woods
West Des Moines, IA 333,562 408,055 313,187 480,407
Valley Creek II
Woodbury, MN 520,052 387,959 537,062 482,472
Washington Ridge
Knoxville, TN 656,250 656,250 786,095 778,069
Woodlane Place
Woodbury, MN 707,716 600,917 811,433 624,623
------------ ------------ ----------- -----------
$ 5,159,024 $ 4,698,698 $ 4,916,057 $ 4,613,310
============ ============ =========== ===========
</TABLE>
(1) Exclusive of amounts paid to the Partnership from the properties' reserves
and/or general partners of the borrowers. Such amounts were $17,834 and
$213,531 for the nine months ended September 30, 1995 and 1994,
respectively.
(2) Calculated from the respective properties monthly operating reports as
net loss, adjusted for depreciation, amortization, mortgage loan
interest, mortgage servicing and administration fees and interest
income on reserves.
(3) Rental operating information is not provided for the Paces River 2
investment because it is accounted for as an Investment in Mortgage Revenue
Bond and Working Capital Loan.
-28-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF III Associates
Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), C.R.I.,
Inc., William B. Dockser, H. William Willoughby, Capital Realty Investors Tax
Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership, CRITEF,
Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the State
of Delaware. The lawsuit alleges, among other matters, that certain of the
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of an
affiliate of the Partnership, against the same Defendants, in Chancery Court for
the State of Delaware. The second lawsuit makes the same allegations as the
first lawsuit. A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the lawsuits, therefore, the Partnership's financial
statements do not include any adjustment that might result from the outcome of
the lawsuits. The Defendants believe that the lawsuits are without merit and
intend to defend themselves vigorously against the allegations contained in both
lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A report on Form 8-K was filed with the Commission on September 13, 1995
regarding the Partnership's acceptance of a cash merger offer from an affiliate
of CAPREIT for redemption of the Partnership's BACs, subject to BAC Holder
approval.
All other items are not applicable.
-29-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors Tax Exempt
Fund III Limited Partnership
By: CRITEF III Associates Limited Partnership
General Partner
By: C.R.I., Inc.
General Partner
November 14, 1995 /s/ Richard J. Palmer
- - -------------------------- ------------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the Registrant
and as Principal Accounting Officer
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 131,737
<SECURITIES> 5,605,302
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 82,123,975
<DEPRECIATION> 13,464,641
<TOTAL-ASSETS> 85,419,187
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 79,273,833
<TOTAL-LIABILITY-AND-EQUITY> 85,419,187
<SALES> 0
<TOTAL-REVENUES> 10,281,919
<CGS> 0
<TOTAL-COSTS> 7,260,374
<OTHER-EXPENSES> 580,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,578,160
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,578,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,578,160
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
